In today’s Market Factors, I take a look at investment strategies for nervous investors, suggest a real estate investment trust that could be an attractive buy right now, and share an assortment of timely thoughts.
Equities
Four risk-conscious investment strategies
Newish BMO chief investment strategist Francois Trahan helpfully published four separate risk-conscious investment strategies in a Tuesday report to help investors through this period of volatility. Mr. Trahan emphasized that this is not an exhaustive list of potential risk-focused portfolio strategy options, just those best suited to current conditions.
The first option he calls “Middle Beta” which is focused on sectors that are neither positively nor negatively correlated to the economic cycle. In his words, this strategy is “helpful when one knows that a transition is coming but wants to avoid shifting their portfolio too early or too late.” In the U.S. market, middle beta stocks are predominantly found in the industrials, materials and energy sectors.
Option number two for risk-conscious investors is called the F&G Model. The F refers to F-Score - a system developed by academic Joseph Pietroski to separate promising value opportunities from stocks that will remain cheap forever. The G refers to a similar study done by another academic, Partha Mohanram, for the growth sector.
The F&G process involves choosing growth stocks with the F-Score method and value stocks with the growth investing methodology. It helps that profitability measures like cash flow return on assets, usually the province of growth investors, are prominent in the F-Score method. The end result of the F&G approach if it works, and Mr. Trahan identifies it as his favourite, are stocks representing the most promising candidates for both value and growth candidates.
The third portfolio construction suggestion is the “Desirable Traits” method. This involves stock traits that were leading to outperformance before the Iran conflict and then kept working as the crisis intensified. The three factors that qualify currently are stocks with attractive capital expenditure to sales ratios, high inventory turnover and high EBITDA yield. Uncovering these factors that sustained outperformance despite the news flow is “a goldmine of information from the market,” according to Mr. Trahan.
High quality cyclical stocks, investing option number four, is a risk-mitigation strategy, according to Mr. Trahan, and was favoured by the strategist before the events in the Middle East. The cyclical aspect was expected to benefit from U.S. fiscal and monetary stimulus, boosted by the ridiculously named One Big Beautiful Bill, while the high quality characteristics were designed to protect downside in the event the multi-year risk-on trend faded. The screening method favoured energy and materials stocks that have continued to outperform. This approach also limited defensive sectors and surprisingly this has also helped the quality cyclicals approach to outperform.
The S&P 500 had lost 6.7 per cent since the Iran conflict started when the BMO report was published. The Desirable Traits strategy had protected value by only registering a 2.0 per cent loss. Quality Cyclicals had lost 2.6 per cent, the F&G approach registered a 5.9 per cent decline and the Middle Beta selections’ loss was equal to the benchmark.
The only individual stock selections featured in the research report were the result of a three factor score involving cyclicality, quality and a hedge against higher inflation. The top scoring stocks were, in order: Estee Lauder Companies Inc. (EL-N), CF Industries Holdings (CF-N), Global Payments inc. (GPN-N), Chevron Corp. (CVX-N), Intel Corp. (INTC-Q), American International Group (AIG-N), and LyondellBasell Industries NV (LYB-N).
I would have asked BMO for more stock selections but they didn’t want me to have the report in the first place, I had to get it by roundabout means. I am, however, happy for BMO clients because they now have access to Mr. Trahan’s analysis which I’ve always liked. It’s novel, very in-depth but not overly complicated and I look forward to seeing more reports.
The Westbury Chartwell retirement residence in Etobicoke, Ont.Christopher Katsarov/The Globe and Mail
A REIT idea
There is a shortage of retirement home beds and more elderly every year, which sets up the seniors housing industry for pricing power and high, consistent profitability. Scotiabank analyst Himanshu Gupta recently argued that now is a good time to add Chartwell Retirement Residences (CSH-UN-T) to your portfolio.
Chartwell is down more than 10 per cent since the Iran conflict began, dragged down by both broad de-risking and scrutiny from the Competition Bureau, which is concerned about the company’s market dominance in the Kitchener-Waterloo region.
Mr. Gupta sees both defensive and growth attributes in Chartwell. The company is now trading at a 1.6 per cent discount to net asset value and an attractive 17 times adjusted funds from operations.
The available supply of retirement homes is expected to remain flat this year, maintaining a supply shortage that offers downside protection for revenue.
The essentials
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Globe Investor highlights
CIBC’s chief market technician Sid Mokhtari reveals his Top 10 stock picks for April
Why China outperformed most world equity markets in a tumultuous month
Good income gushers are getting hard to find in this market, but David Berman has some suggestions
Warren Buffett is feeling just fine with sitting on high levels of cash at Berkshire Hathaway
Mega IPOs are set to test U.S. market depth despite high levels of volatility
Quick hits
Normally I don’t care about fund manager holdings because the sector and individual stock weightings are neither positively or negatively correlated to future returns. The exception is at market extremes, when the sector weightings prove disastrous but those are only apparent in hindsight.
That said, I was interested to read in a BofA Securities report that U.S. fund managers are still 30 per cent underweight the energy sector. This implies further upside for the sector, if all else remains equal. Environmentally conscious investment funds and pension managers may be partly responsible but if the Iran conflict drags on there’s going to be even more underperforming funds than usual.
Evercore ISI strategist Julian Emanuel wrote that most institutional portfolios are unprepared for normal, more stable market conditions. He suggested getting ahead of the game by buying from a “stocks for stability” list that includes Amazon.com, Disney Corp., Microsoft, Salesforce Inc., Align Technology, Coca-Cola, Boston Scientific Moody’s Corp., Siemens Energy and Palo Alto Networks.
A Morgan Stanley survey of 2,000 people found that 68 per cent of white collar workers are using AI once or more per week and 44 per cent of blue collar workers do the same. I am using Copilot and Gemini multiple times per day. I go to AI any time I get stuck on anything, including column ideas, electronics setups (it’s very useful for How-tos), video game strategy (Elden Ring is hard) and retirement planning.
Read this week’s earnings and economic calendar here